psers/sers presentation 9/29/11

State Pension Funding

David DurbinSERS Office of Member Services Director

Jeffrey ClayPSERS Executive Director

Prepared by PSERS & SERS for the Senate Finance Committee - September 28, 2011



Table of Contents

Snapshot of the Systems 1

Funding Streams 2

Cost of Benefits Reduced in 2010 3

Remaining Budgetary Challenge -- The Debt 4

PSERS Graph 5

SERS Graph 6

Debt Built Over Decades 7

PSERS History of Employer Contributions Graph 8

SERS History of Employer Contributions Graph 9

Case Law on Contract Impairment 10

Popular Legislative Options 11

Cost of Closing Plans 12

A Combination of Solutions 13

The Good News 14

The Bad News 15

PSERS Investment Return Stress Test Data 15

SERS Investment Return Stress Test Data 16

Cash Infusion Projections 17

Other Issues to Consider 18

Prepared by PSERS & SERS for the Senate Finance Committee - September 28, 2011 1


Snapshot

Public School Employees’ Retirement System(as of 6/30/10)

579,000 members282,000 active 185,000 retirees/beneficiaries112,000 vested inactive

749 employers

$51.4 billion in assets (as of 6/30/11)

75.1% funded (actuarial value)57.8% funded (market value)

$19.7 billion unfunded liability

State Employees’ Retirement System(as of 12/31/10)

227,000 members109,000 active112,000 retirees/beneficiaries6,000 vested inactive

106 employers

$26.0 billion in assets

75.2% funded (actuarial value)66.1% funded (market value)

$9.7 billion unfunded liability



SERS Funding(10-Year History)

InvestmentIncome

73%

MemberContributions

18%

EmployerContributions

9%

Pension systems are designed to remain solvent by receiving three regular funding streams—employee contributions, employer contributions, and investment earnings.

PSERS Funding(10-Year History)

InvestmentIncome

69%

MemberContributions

19%

EmployerContributions

12%



Pennsylvania public pensions were reformed in 2010, reducing the cost of benefits for new employees hired after Jan. 1, 2011 to just 3% (PSERS) and 4% (SERS) of payroll.

• Reduced benefit accrual for new employees by 20% -- from 2.5% to 2% of salary for each year of service

• Retained employee contributions at pre-reform levels

• Created “shared risk” to allow increased employee contributions in certain circumstances

• Increased normal retirement age

• Eliminated lump sum withdrawal of contributions and interest at retirement

• Rolled back the vesting period to ten years

• Required that members purchase prior nonstate service at full actuarial cost

• Reamortized existing liabilities through an actuarial “fresh start”

• Capped growth of employer contributions: - 3% in FY 11/12- 3.5% in FY 12/13- 4.5% thereafter until no longer needed

The Employee Benefit Research Institute found that retirement funding for private employers amounts to about 3.5% of employee compensation.

In May 2010, the Wisconsin Legislative Council found that major public employee retirement systems provided employer contributions ranging from 1.95% (MA) to 17.01% (ME), with a median in the 8% range.

Some recent legislative proposals in Pennsylvania attempt to achieve savings by closing the existing defined benefit plans and replacing them with 401(k)-style defined contribution plans, including a 6% employer match.



Despite the $2.9 billion in savings achieved by pension reforms, a significant budgetary challenge remains.

A $29.4 billion debt has already been incurred.$19.7 PSERS $9.7 SERS

A debt of the Commonwealth, backed by the full faith and credit of the Commonwealth

“Statutory interest charges payable, the maintenance of reserves in the fund, and the payment of all annuities and other benefits granted by the board under the provisions of this part are hereby made obligations of the Commonwealth. All income, interest, and dividends derived from deposits and investments authorized by this part shall be used for the payment of the said obligations of the Commonwealth.”

State Employees’ Retirement Code, Title 71, Pa.C.S. §5951 Public School Employees’ Retirement Code, Title 24, Pa.C.S. §8531



PA Public School Employees' Retirement SystemComponents of Projected Total Employer Contribution Rate - Act 120

Based on June 30, 2010 Actuarial Valuation - Assumes 8% Rate of Return

0%

5%

10%

15%

20%

25%

30%

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

2034

2035

2036

2037

2038

2039

2040

2041

2042

2043

2044

Fiscal Year

Tota

l Em

ploy

er C

ost a

s Pe

rcen

tage

of P

ayro

ll

Health Care Employer Normal Cost Unfunded Liability

Unfunded Liability Rate

Employer Normal Cost

Rate Collars in effectFY 2012 to FY 2015



SERS Employer Contribution ProjectionsPresuming Plan is Closed to New Members

($ millions)

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

$2,000

2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039 2041 2043

Con

trib

utio

n

Fiscal Year Ended June 30

Unfunded LiabilityContribution Dollars

Normal Cost Contribution Dollars



Factors influencing the $29.4 billion debt have been building over decades.

The $29.4 billion debt is largely the result of:

• employer contributions below normal costs

• losses that neutralized the past investment gains used to justify low employer contributions

• benefit increases without increased funding streams

• funding changes to extend time to pay down liabilities

• cummulative negative impact of the above on investment returns

Despite 2008’s unprecedented investment losses, PSERS’ and SERS’ long-term investment performance has exceeded actuarial return objectives.

PSERS SERS

Current Actuarial Return Objective 7.5% 8.0%

One-Year Return (ending June 30, 2011) 20.4% 18.8%

25-Year Rate of Return (annualized, net of fees) 8.8% 9.0%



0

3

6

9

12

15

18

21

1982 1987 1992 1997 2002 2007

Perc

ent

Year

History of PSERS' Contribution Rates as a Percent of Payroll

Average Member Rate Employer Contribution Rate Employer Normal Cost Rate

2011



15-Year Total$3.6 Billion

1981 1992 2000 2004 20121984 1988 1996 2008

4.00%

8.00%

12.00%

16.00%

20.00%

24.00%

28.00%

32.00%

History of SERS' Employer Contribution Ratesas a Percent of Payroll

Employer Contribution Rates Employer Normal Cost Rates

��

8.7%8.3%

8.21%

3.6%

8.4% �9.5%

�

0.0%

3.0%4.0%

5.0%

8.0%

11.5%

16.0%

18.1%

13.1%

9.9% 10.3%

5.0%

1.4%

4.08%*

Projected RatesSERS 03-08-11



Case law has held that contract clauses prohibit benefit changes for existing employees.

A significant body of case law establishes that the contract clauses of the United States and Pennsylvania constitutions protect public retirement benefits from being retroactively changed in any way that may be interpreted as a “net detriment” to employees. This prohibits not only reductions in already earned benefits but also reductions in the rate of future benefit accrual.

A “net detriment” has been found in both reductions in benefits agreed-to at the time of hire and in increases in employee contributions in order to maintain the same level of agreed-to benefits.

Although the General Assembly can change the employment contract of new employees to allow future reductions—as occurred with recent reforms—even a constitutional amendment is unlikely to allow the reduction of already earned benefits and may not allow the reduction of future accruals for existing employees.



Many seemingly sensible attempts to further reduce costs do not actually cost less and may well exacerbate the debt issue to potentially insurmountable proportions.

Some of the more popular legislative options seem to be:

• creating a “cash balance” tier to the current defined benefit plan

• developing a “hybrid” plan that includes both defined benefit and defined contribution components

• closing the defined benefit plan in favor of a 401(k)-style defined contribution plan



Any proposal that includes closing the current defined benefit plans would exacerbate the debt issue to potentially insurmountable proportions.

The commonwealth would have to pay off the existing debt while also paying for whatever new retirement benefit is put in its place.

Pension plans must be fully funded as of the date the last member is eligible to retire. Thus — because there would be no new members joining the plan — the clock would start ticking and the $29.4 billion debt would be due within about 35 years.

As the plans wind down fewer people would be paying in, the employer share would be spread over fewer employees, and there would less time to make up for market fluctuations. The commonwealth’s share of the existing debt would become intolerably volatile.



The most likely way to deal with a debt of this size is

a combination of solutions including substantial funding infusions and consistently

higher levels of employer funding over time.



The Good News

Pension reform benefit reductions have helped create proportionately higher levels of funding.

Higher levels of funding may possibly be achieved by reallocating dedicated funding streams.



The Bad News The funds cannot “earn” their way out of this debt through existing investments.

PSERSStress Test Summary

Baseline

Early Decade

RecessionLast

DecadeGreat

Recession4 GreatYears

Projected Return by Fiscal Year (FY) Ending June 30th

Current w/Act

2010-120

Stress 1 FY 2001 - 2003 returns for FY 2012 - 2014

Stress 2 FY 2002 - 2011 returns for FY 2012 -2021



2012 7.50% -7.40% -5.26% -2.82% 19.67%

2013 7.50% -5.26% 2.74% -26.54% 12.87%

2014 7.50% 2.74% 19.67% 7.50% 15.26%

2015 7.50% 7.50% 12.87% 7.50% 22.93%

2016 7.50% 7.50% 15.26% 7.50% 7.50%

2017 7.50% 7.50% 22.93% 7.50% 7.50%

2018 7.50% 7.50% -2.82% 7.50% 7.50%

2019 7.50% 7.50% -26.54% 7.50% 7.50%

2020 7.50% 7.50% 14.59% 7.50% 7.50%

2021 7.50% 7.50% 20.37% 7.50% 7.50%

2022 and there after 7.50% 7.50% 7.50% 7.50% 7.50%

ResultsMax Employer Contribution Rate*

27.72% 34.93% 30.70% 38.10% 23.98%

Dollars at Max Rate, in millions**

4,930.2 8,244.1 7,778.1 9,652.9 3,755.8

Max Rate Fiscal Year FY 2020 FY 2028 FY 2030 FY 2030 FY 2016

* - Include Healthcare Premium Assist.** - Includes Commonwealth and School Share



The Bad News

SERSStress Test Summary

Baseline

Early Decade

RecessionLast

DecadeGreat

Recession3 GreatYears

Projected Return by Year

Current w/Act

2010-120

Stress 1 2000 - 2002 returns for

2011 - 2013

Stress 2 2001 - 2010 returns for 2011 -2020

Stress 3 2008

returns for 2011

Stress 4 2004 - 2006 returns for

2011 - 2013

2011 8.00% 2.20% -7.90% -28.70% 15.10%

2012 8.00% -7.90% -10.90% 8.00% 14.50%

2013 8.00% -10.90% 24.30% 8.00% 16.40%

2014 8.00% 8.00% 15.10% 8.00% 8.00%

2015 8.00% 8.00% 14.50% 8.00% 8.00%

2016 8.00% 8.00% 16.40% 8.00% 8.00%

2017 8.00% 8.00% 17.20% 8.00% 8.00%

2018 8.00% 8.00% -28.70% 8.00% 8.00%

2019 8.00% 8.00% 9.10% 8.00% 8.00%

2020 8.00% 8.00% 11.90% 8.00% 8.00%

2021 and there after 8.00% 8.00% 8.00% 8.00% 8.00%

ResultsMax Employer Contribution Rate

25.9% 38.9% 33.4% 41.2% 20.8%

Dollars at Max Rate, in millions

1,757.9 2,894.3 2,804.4 3,065.7 1,370.3

Max Rate Fiscal Year 2016/2017 2019/2020 2023/2024 2019/2020 2015/2016

The funds cannot “earn” their way out of this debt through existing investments.



More Bad News

Funding infusions have to be massive to “move the needle.” They are important as part of the combination of solutions necessary to deal with the debt but they are not likely a viable solution on their own.

Cash Infusion ProjectionsAdditional Infusion Required In 2011 To Reduce SERS Contributions Below Target($ in billions)

Amount Needed (30-Yr Amortization)

Amount Needed (10-Yr Amortization)

Target Percent of Payroll

To Keep All Future Contribution Rates

Below Target

To Keep All Future Contribution Rates

Below Target

<20% $3.8 $9.4

<15% $7.4 $11.7

<10% $10.9 $14.1

NOTE: Per current law, rates assume collars of 1% in FY11, 3% in FY 12, 3.5% in FY13 and 4.5% in FY14+ until no longer needed.

SERS 09-12-11

Cash Infusion ProjectionsAdditional Infusion Required as of July 1, 2011 to Reduce PSERS Contributions Below Target ($ In billions)

Amount Needed (30 yr Amortization)

Amount Needed(10 yr Amortization)

Target Percent of Payroll

To Keep all Future Contribution Rates

Below Target

To Keep all Future Contribution Rates

Below Target

< 20% $15.23 $27.29

< 15% $26.71 $34.17

< 10% $37.39 $41.04

Rates assume a 1% collar on FY 11, 3% on FY 12, 3.5% on FY 13, and 4.5% on FY 14 and above until collars are no longer needed. (Act 120 collars) Rates projected based upon PSERS June 30, 2010 actuarial valuation.



Aside from the budgetary concerns, there are some other issues to consider:

• Bond ratings

• GASB exposure draft

• Employee recruitment and retention

• Benefit adequacy

We’re in this together. As your partners and technical experts, we are ready to do whatever it takes to help.

Jeffrey ClayPSERS Executive [email protected]



David DurbinSERS Office of Member Services Director

psers/sers presentation 9/29/11

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